On 16 May 2019, the ANP published Resolution Nº 785 (Resolution) introducing new rules aimed at promoting the transfer of interests in oil and gas fields and reserve based lending.
This is an important development in creating a more liquid and diverse market in upstream oil and gas assets, particularly mature assets, where new investments are required to maximise recovery. Brazil’s mature fields have been declining very rapidly over recent years, as state-controlled oil company, Petrobras, which owns most of them, has focussed its investments on new field developments in the prolific pre-salt region. Field recovery rates are low, at around 24% in the Campos basin. Worldwide, the recovery factor is around 35%, while in Norway it even reaches 50%. Rapidly declining production from mature fields is almost entirely wiping out the gains from new pre-salt fields. The National Petroleum Agency (ANP) has understood the importance and urgency of getting these assets into the right hands, and has recently introduced several initiatives to promote new investment in mature fields, such as the reduction of royalties on incremental production.
Transfer of interests
Rights and obligations under oil and gas concessions and production sharing agreements (PSAs) may only be transferred with the prior authorisation of the ANP and provided the assignee fulfils the relevant established technical, financial and legal requirements. The transfer of interests may also, in certain circumstances, be subject to the advance approval of the Brazilian antitrust authority (CADE).
The Resolution gives useful detail regarding the procedure to be followed, and criteria, for the ANP’s analysis of requests for consent to transfer (as well as replacement of guarantees, corporate restructuring etc.). It allows oil companies to request the joint and simultaneous approval of two or more transfers that, by their nature, justify the joint analysis. This makes sense where oil companies may be disposing of a package of different oil fields to a single purchaser, which would not want to acquire only some of those assets, perhaps because of synergies between them. In future, the ANP should consider the transfer deal as a whole, rather than separate applications for each concession.
Applications for the assignment of interests may also be accompanied by a new proposed Development Plan, which would be approved by the ANP simultaneously with the assignment. This may allow savings in time and cost for all parties involved, as it avoids the need for separate applications to the ANP. More importantly, it will give certainty to an incoming field owner that it will be able to redevelop the field in the way it thinks best, to maximise recovery and revenues. Where the incoming field owner is proposing new investments in mature assets, the approval of this Development Plan may also allow them to take the benefit of a lower royalty rate on production resulting from those investments.
This resolution is another step in the right direction, and should help to create a more liquid market for oil and gas assets in Brazil.
Reserve Based Lending
Potential new entrants in the Brazilian upstream are unlikely to have the balance sheet borrowing capacity of Petrobras and the major international oil companies, which may be selling out of mature producing assets. In the North Sea, many of these fields have been sold to lower cost, late life production specialists, for which investment in incremental production gains are a priority. However, these newcomers are often smaller companies that lack the portfolio of large projects to compete for funds, especially considering the decommissioning obligations attached to mature fields.
To facilitate the financing of new investments by this type of oil company, the Resolution also introduced measures to encourage reserve based lending (RBL). RBL is a way in which oil and gas companies can borrow money to fund new investments, by granting banks security over their oil reserves. Unlike in the U.S., but like in the U.K. and many other countries, in Brazil property in oil and gas in the ground remains with the nation. It only passes to the oil companies when it is produced. The security therefore needs to be taken over the rights to produce those reserves, rather than the reserves themselves.
The ANP has run public hearings to understand what regulatory changes were needed to encourage banks to lend on this basis. One issue, which the Resolution addresses is the need to obtain ANP consent to assignment of an interest in the concessions and PSAs. The Resolution makes clear that no such consent is required to a conditional assignment of the rights to production, by way of security for a loan. The oil company borrower will only be required to notify the ANP of that assignment, rather than seek prior authorisation, provided that the oil company maintains its management rights under the concession or PSA. If the oil company defaults under the loan, the lender must notify the ANP again, and may assume certain rights under the concession / PSA. To eventually enforce the security and assign the defaulting borrower’s interest in the agreement, the ANP’s prior consent will be required at that time. This is similar to the position under the U.K.’s “open permission” security regime.
RBL lending is an efficient way of financing smaller oil companies, which do not have the balance sheet strength of the majors, but are leading the way in revitalisation of mature fields in, for example, the North Sea (although RBL has been applied to fields in many jurisdictions all over the world). Unlocking this source of funding could be critical to Brazil’s efforts to reduce entry barriers and attract new players to make these investments in mature fields.